Upstart Holdings, Inc. Q3 FY2025 earnings call

• Business Overview: Upstart continued to execute on its 2025 game plan with 80% year-on-year growth in transaction volume and 71% revenue growth, and was nicely profitable again. Consumer applications exceeded 2 million in Q3, the highest in over 3 years.
• Product Segments: Newer products (small-dollar loans, auto, home) showed strong growth. Auto retail expanded to 4 new states, and auto secured personal loans began gaining traction. HELOC auto approvals increased from less than 1% in June to ~20% in October.
• Technology and Model: The model adjusted to macroeconomic signals, reducing approvals and increasing interest rates. Improvements in model calibration were made to reduce conversion volatility, with plans to minimize month-to-month volatility in model calibration-driven conversion changes by about 50%.
• Funding: Strong position in core business with significant excess capacity. Added 7 new bank/credit union partners, reached new all-time high in monthly available funding from them. Had 10 active capital market partners, with 100% retention of private credit partners, and a securitization with strong demand.

In Q3 2025, Upstart's total revenue was approximately $277 million, up 71% year-on-year and 8% sequentially. Fee revenue was approximately $259 million, up 54% year-on-year but short of internal expectations. Net interest income was approximately $19 million, higher than expected. Loan transactions across the platform were approximately 428,000, up 128% from the prior year and 15% sequentially. Newer products (small-dollar loans, auto, home) accounted for almost 12% of originations and 22% of new borrowers in Q3, with transaction volume for auto, home, and small-dollar each growing in the range of 300% year-on-year. The average loan size was approximately $6,670, 12% lower than the prior quarter due to a mix shift towards smaller loan products and model caution.

• Q4 2025 is expected to have total revenues of approximately $288 million, consisting of revenue from fees of approximately $262 million and total net interest income of approximately $26 million. Contribution margin of approximately 53%, GAAP net income of approximately $17 million, adjusted net income of approximately $52 million, adjusted EBITDA of approximately $63 million.
• For the full year 2025, total revenues are expected to be approximately $1.035 billion, with revenue from fees of approximately $946 million and net interest income of approximately $89 million. Adjusted EBITDA margin of approximately 22%, and GAAP net income of approximately $50 million.

• Model conservatism due to macroeconomic signals led to reduced approvals and conversion rates. There is potential impact of macroeconomic uncertainties on credit performance and model responsiveness. Competitive landscape and challenges in new product segments could pose risks.

Q: Just wanted to ask a quick question on the application demand. It seems very strong quarter-over-quarter. Maybe, Sanjay, if you can comment on the strong demand in the third quarter, and then maybe just like tie it all into the guidance, which was a little bit below what we were expecting and below the guidance in 2Q. So, how do you square these 2 things together?

A: Dan, this is Dave. Yes, as we said in the remarks, we grew applications about 30% quarter-on-quarter, which was ahead of the origination, the transaction volume quarter-on-quarter. And really, a lot of things came together in terms of just marketing programs and cross-selling and all these things. So the application growth is certainly great to see. I think what it really highlights is that our model took a step towards conservatism during the third quarter, just based on seeing macro factors. And I think that is just a natural thing we might expect. As we said, it's since reverted, but it was a period of time where it saw signals, and it was moving quickly. I think maybe overreacting. I think in some sense, having a model that overreacts is better than having ones that underreact because it did revert. But I think it is useful to point out that the application volume was quite strong, our strongest in 3 years, and grew quite a lot. And I think that's a very healthy statement for the business, even if it didn't in Q3 transfer to as much volume as we expected.

Q: I wanted to ask specifically in auto, obviously, there's been some high-profile bankruptcies and kind of negative credit events in the space. Have any of the headlines or news impacted your expansion plans or how conversations with customers are going? Or I guess just how has the recent news and events impacted how you guys are viewing things and progressing in auto right now?

A: Yes. None of that has had a direct impact on us for sure. We have not seen that type of couple of examples that were out there of fraud zone activity. So, I don't think it's anything that we would describe as widespread. It's not something from our perspective that is widespread. I think when you have examples like that, it does create a little bit of caution in the market. So banks or others providing senior financing probably do a bit more diligence, et cetera. But I don't think there's any wholesale change in the market, but that is the nature of it. A couple of the larger banks got bitten on that particular auto lender. But we've been pretty rigorous about building processes to make sure we're effectively underwriting the dealership themselves and mitigating risks against dealer activity that's not what we want. So, this is an area that I think we're handling well. We have not seen any major issues. But again, I think whenever you read headlines, it does cause a little caution in terms of increasing amounts of diligence or questions that need to be asked, et cetera, but that's part of the course